Electricity Rates To Be as Big as Texas This Summer! The Good, The Bad, and The Ugly

Electricity Rates To Be as Big as Texas This Summer!

The Good, The Bad, and The Ugly

                  If you live in Texas and you use electricity, this is going to be an interesting summer!  Texas is facing nearly a perfect storm that could create some record-breaking electricity prices throughout the summer.  And, the impact won’t just show up in the wholesale markets, it’s going to start affecting your pocketbook too.  Luckily, there are more and more tools that are becoming available to residential electricity customers to help weather this perfect storm.


The Bad – ERCOT Predicting Tight Reserves


ERCOT, the Electric Reliability Council of Texas, who operates the wholesale grid for most of the state, is predicting that demand for electricity could meet or exceed available supply at certain times during this summer (http://www.brownsvilleherald.com/news/business/article_f0628c24-da1a-11e2-b513-001a4bcf6878.html).  Texas is very close to a self-contained system when it comes to electricity, with only a few connections to neighboring transmission grids.  This means that the electricity that gets used in Texas is made in Texas.  So, if the amount of electricity demanded at any particular time exceeds what’s available, the electrical grid can become unstable.  The remedy to this is to institute rotating outages, or “rolling brownouts” to reduce the demand on the electricity to the amount that can be supplied by the power plants located in Texas.

Peak demand for electricity in Texas normally occurs between 3pm and 7pm on weekdays.  This coincides with the warmest time of the day and when most of us crank up our air conditioners when we get home after work.  The hotter the weather outside the more strain there is on the grid.  This happens for two reasons.  First, when it’s warmer outside, we’re more likely to turn on our air conditioners, and they’re more likely to work harder to get the temperature in our homes to a comfortable level.

Secondly, the warmer it is outside, the warmer are the wires bringing the electricity to your house.  Allow me digress into the physics of electricity for a second.  The equations for power are:

Power = voltage x current

Voltage = current x resistance

So, Power = (current^2) x resistance

And, that’s what gets us into trouble on warm days.  The warmer the outside temperature, the greater the resistance on the wires, and the more electricity is lost as heat on its way from the power plant to your house.  The more electricity lost as heat, the hot the wire gets, and the more electricity is lost as heat.  It’s a vicious cycle.

So, on warm days, we’ll be demanding more electricity to run our air conditioners, and more electricity than that will be needed to offset the increase transmission losses of getting the electricity to our homes.

Couple that with the fact that the power plant additions haven’t kept up with how much more electricity Texas is demand at those peak times (http://www.eia.gov/todayinenergy/detail.cfm?id=11811&src=email), and we could be in a heap of trouble.


The Ugly – Price of Wholesale Electricity


The electricity demand aspect is a big concern when it comes to having a stable grid in Texas this summer, but it’s not the only factor that’s at play here.  The price cap for the ERCOT wholesale market has been increased to $5,000 per MWh ($0.50 c/kWh), up from $3,000 per MWh ($0.30 c/kWh) from last summer.  As residential customers, you shouldn’t be in a position to pay this directly, but let me demonstrate how it’s eventually going to affect the rate you pay for electricity.

Well, if you’re on an hourly rate, you could have to pay this directly.  It depends on whether or not your rate is indexed based on real-time wholesale prices or day-ahead wholesale prices.  If you’re on real-time pricing, you could have to pay that rate.  If you’re on day-ahead pricing, you’ll probably be able to avoid the bulk of it.  ERCOT and other wholesale markets aren’t great at predicting exactly when a peak demand hour will occur, even a day ahead.  The peak demand hour is typically a combination of a really hot day and one in which there is an unexpected issue with a source of electricity (like when it’s really, really hot, and the wind doesn’t blow to turn the wind turbines).  Luckily, hourly rates are still fairly rare, and this doesn’t apply to most of us.

If you’re on a variable monthly plan, you could face some impact of these high wholesale rates.  Your rate is ultimately determined based on what it cost your retail provider to provide electricity to you, and this is done on a monthly basis.  All electricity providers source their electricity through a combination of long-term and short-term electricity contracts, and wholesale market spot (hourly) buys.  If your electricity provider relies heavily on the wholesale market spot buys, your monthly rate could be significantly higher.

If you’re on a fixed rate plan, the good news is that you’re not going to see the impact of this summer’s peak price in your electricity bills this summer.  But, as your electricity provider and other providers determine what they need to charge for their fixed price plans going forward, they’ll remember how much they had to pay for electricity this summer, and how likely they are to have to pay those high prices again in the future.  The prices for all fixed rate plans will go up because of this, the only remaining question is by how much.

(The cap will be at $7,000 per MWh in 2014, and $9,000 per MWh in 2015.  So, expect there to be some sort of increase in those years as well.)


The Good – There’s Something You Can Do About It


But, there is some good news.  There’s are more and more options for you to avoid paying those high prices, and even possibly lower your overall electricity bill just for taking a few simple actions.

Have you heard of a Nest thermostat?  It comes from a start-up company in California started by guys who helped design the iPod and iPhone for Apple.  Isn’t this sexy?

Screen Shot 2013-07-02 at 3.31.46 PM


So, this thing has a ton of benefits built in.  First, it learns your habits and helps you save electricity just by controlling the temperature for you.  (Nest does a great job of explaining what they do, so go ahead and check them out: www.nest.com.)  Plus, you can become a part of your utility’s Demand Response program where the utility will pay you if you allow them the ability to turn down your air conditioner on those really hot “peak demand” days.  You can always opt out at the last minute, but the savings make this interesting (http://www.greentechmedia.com/articles/read/Nest-Labs-Moves-Further-into-Residential-Demand-Response).

Also, a lot of the electricity providers are getting into the game of addressing usage during peak demand times.  The electricity providers are starting to realize that it’s really expensive for them to plan on providing a ton of electricity during the peak demand times, and it’s much easier and cheaper if they pay you a little bit of money for you to reduce your electricity consumption during the peak demand times.  I know that Champion Energy and Direct Energy have programs, so does Bounce Energy (Peak Rewards)  so give your current supplier a call and see if they have a plan you can sign up for.


The Round-Up

                  So, here’s the gist.  It’s going to be hot this summer in Texas.  (I don’t think any of us needed a crystal ball to figure that one out.)  Because it’s going to be hot, the air conditioners are going to run a more, which could cause the demand for electricity to exceed supply.  If that happens, the price of electricity could go as high as $5,000 per MWh ($0.50 c/kWh), and there could be some rolling brownouts.  But, you can save money on your electric bill by signing up for a demand response program (either through your utility or through your electricity provider).  They’ll pay you for reducing the amount of electricity you use during the periods of peak demand.

And there you go… The Good, The Bad, and The Ugly!


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